How China Is Developing Blockchain on Its Own Terms

In May 2018, President Xi Jinping declared blockchain – which powers bitcoin and other virtual currencies – a “breakthrough” technology while addressing a crowd from the Chinese Academy of Sciences and the Chinese Academy of Engineering. Since then, the Chinese government has been singing its praises, calling it “10 times more valuable than the internet.” This came just less than a year after officials began their nationwide crackdown on all cryptocurrency trading and initial coin offerings, resulting in the closures of dozens of ICOs and cryptocurrency exchange services within the country since September 2017. But just why is China suddenly changing its tune and becoming so determined to turn itself into a global hub for blockchain technology development even after shutting down the trading of bitcoin, its most well-known application?

Funding a Dream

At first glance, Bay Valley in Shanghai's Yangpu district looks like the rendering of an ideal workplace found inside the glossy pages of an architectural design magazine. Clusters of modern office towers with glass facades are sparsely laid out across the 660,000-square-meter compound, connected by idyllic tree-lined pathways and plenty of well-maintained green spaces.

After nearly an hour-long commute from People's Square, I arrive at Tower C7 in the development's newest phase. While its interiors are still under renovation, Yangpu district already has high hopes for the space. Last fall, local officials bestowed the title of 'Blockchain Building' upon the nine-story structure. Once completed, all 19,000 square meters of C7 will be fully dedicated to hosting blockchain research and technology development firms. Tenants here will enjoy generous subsidies such as rental discounts and even housing allowance for staff (a 'Blockchain Apartment' is also being built right next to Bay Valley).

A short walk across the compound in Tower A6 is where I meet Trista Ding, a representative of Shanghai Blockchain Technology Association. Established in November 2018, the nonprofit organization is the city's only government-backed blockchain association, falling under the umbrella of the Shanghai Association for Science and Technology. Its mission is to act as a bridge between the government and the industry in order to promote "rapid, healthy and efficient" growth for the technology, and to establish a "safe and highly effective ecosystem," as well as "a framework for industry standards," Ding tells me, duly highlighting all the keywords.

Yangpu district, of course, isn't the only place handing out perks to blockchain enterprises. Governments of Beijing, Hangzhou, Guangzhou, Shenzhen, Guizhou and others have all introduced different legislations to promote the growth of blockchain development in their respective territories within the past year or two. Suddenly, 'blockchain' has become the buzzword for almost everyone in the tech industry across the Middle Kingdom.

In simple terms, blockchain is the decentralized ledger behind bitcoin invented in 2008 by someone under the pseudonym of Satoshi Nakamoto. A blockchain is a growing list (chain) of records (blocks). Each block contains a cryptographic hash of the previous block, a timestamp and transaction data. With bitcoin, for instance, the ledger consists of the entire chain of transactions, and an identical copy is stored on each of the tens of thousands of nodes (computers) that make up the entire network. Basically, it's virtually impossible for someone to cheat the system or retroactively alter any transaction data unless they're able to access 51 percent of all nodes. Thanks to its tamper-resistant nature, blockchain is often referred to as a system of trust and is revered for its ability to cut out the middleman or a central authority figure to manage the process of all transactional exchanges.

China Market Research Group's Benjamin Cavender believes all of these governmental incentives echo the nation's push to raise the levels of Chinese tech firms in order to compete with their Western counterparts. "As part of the 'Made in China 2025' plan, the country is hoping to become a global leader in the innovation of emerging technologies. They are putting money into developing use cases for blockchain. For example, the central bank has been aggressively exploring the technology inside its banking system, while various companies are looking at how blockchain can be used to execute contracts more effectively. Basically, China is looking at how the technology can be integrated into other parts of the economy besides cryptocurrency," he explains from his office across town.

In many ways, China is the ideal breeding ground for blockchain. Besides all the funding and the underlying support of the government, another reason, Cavender says, is the high number of young technical talents available. "There are many graduates with the computer science and mathematics background required to do the coding work behind the technology. It creates a cycle in which you can develop a new idea, then implement and refine it much faster than anywhere else."

Blockchain Gold Rush

In May 2018, around the same time of President Xi's keynote address to the country's science and engineering community that highlighted his admiration for blockchain, state broadcaster CCTV aired a 60-minute program that served as an explainer for the technology. At the top of the hour, a panel of Chinese and foreign experts delivered a 'Blockchain 101' crash course.

"We're moving from an 'internet of information' to an 'internet of value,'" said Blockchain Revolution co-author Don Tapscott to a live audience. "If I were to send you a PowerPoint or PDF, I can keep the original file, and that's fine. But it doesn't work for assets and things of value, like money, stocks and intellectual property. Cryptographers have been unable to solve this problem until the creation of blockchain." In short, another guest explained, the internet allows you to exchange information, and blockchain allows you to exchange value, before deeming it the 'second phase of the internet.'

Last September, Chinese firms reportedly took up 57 spots of the 'Top 100 Blockchain Enterprise Patent Rankings' list compiled by global intellectual property information media outlet, IPRdaily. Major players like Alibaba, People's Bank of China, Tencent and China Unicom are among the most active patent filers along with IBM, MasterCard, Bank of America and Accenture. Rankings like these are evidence of the heated technological arms race between China and the West. In a 2018 survey compiled by PricewaterhouseCoopers, 85.7 percent of respondents from across many industries in China deem 'security traceability' as blockchain's most valuable quality. Meanwhile, 'supply chain management,' 'data storage' and 'identity authentication' are seen as some of its most useful functions. As such, many global conglomerates and government entities are actively exploring how the technology can be used to improve public services and record-keeping, among other things.

"In China, implementation of blockchain isn't only about the technology and business solutions. It's a much more complex matter"

Many like Tamar Menteshashvili believe China definitely has what it takes to exude strong global influence in the future of this technology. Born in the country of Georgia, Menteshashvili has been working in blockchain solution designs in both private and public sectors since 2014. The PhD candidate at Shanghai Jiao Tong University had previously served as a consultant to the Ministry of Justice of Kazakhstan and the Georgian government in their respective projects for designing digital public service functions, as well as the relevant legal frameworks for implementation. After moving to China in 2016, Menteshashvili founded the SJTU Blockchain Hub, where she organizes talks and workshops featuring local and global industry leaders for students and faculty members of the school.

"When I first arrived in China three years ago, I was amazed not only by the development of blockchain here, but also how highly digitized the market is in general. It has one of the most active investment and startup ecosystems around the world, and is the largest ecommerce market," she comments. "It enables rapid commercialization of digital business models on a large scale. If blockchain-based business models can be successfully implemented in China, it will be considered as 'super use cases.' But in China, implementation of blockchain isn't only about the technology and business solutions. It's a much more complex matter."

Stability Comes First

The year 2018 was undoubtedly a very bad one for the crypto world. After reaching its all-time high at USD19,783 in December 2017, bitcoin's value plummeted by 80 percent in the months that followed. The average daily price of bitcoin in 2018 was also the lowest value reported in the past nine years. Terms like 'bubble burst,' 'crypto winter' and 'market crash' began appearing on news headlines around the globe to sum up everything that had occurred. And as blockchain's most well-known and successful application, the fluctuation of bitcoin's value has affected the confidence of investors in the technology. Although cryptocurrency trading and ICOs have been banned in China since September 2017, many smaller local blockchain startups still sustained the brunt of the impact.

"The quality of many blockchain project proposals in the market are just quite disappointing. This certainly had a negative effect on the investors' confidence. But I think after the irrational hype around blockchain and cryptocurrency recedes, what remains in the market are those who are genuinely interested in developing the technology and creating use cases that can offer realistic outcomes," says Riconi You, founder and CEO of fintech consulting firm FINWEX. "At the same time, officials and the industry need to work together to create a standard of risk assessment for such projects, as well as appropriate regulations around the whole industry."

A December 2018 Forbes feature echoes You's thoughts. In the piece, experts said the estimated 40 percent failure rate among all China-based blockchain projects is way too conservative. "Only a few projects – most likely those under big institutions – will eventually do well. Ultimately, it's winner takes all," Luo Xinghua, cofounder of BBShares (a hedge fund dealing in crypto assets), commented in the article. And if the "winners" Luo was referring to are the nation's handful of state-backed financial institutions, tech giants and telecom companies, then blockchain's main selling point – its decentralized nature – will be fundamentally compromised, the article argued.

Analysts like China Market Research Group's Cavender aren't surprised about this, however. "China's priority is always going to be domestic stability," he says, noting that the ban on cryptocurrency trading was to eliminate potential risks it poses to the stability of the renminbi, or any civil unrest that could be triggered by massive losses in crypto assets investments. For the development of blockchain, the government will likely take the same stance. "It will likely grow in China in a much more stable and controlled way, but I'm skeptical of whether or not the government will be able to control everything. It will be interesting to see how this takes shape."

Another recent example of the Chinese government's expansion of its oversight on blockchain is a set of anti-anonymity regulations that the Cyberspace Administration of China (CAC) introduced early this year. Effective February 15, 2019, all blockchain technology companies are required to collect identification information from users before offering any services involving the use of the technology. Meanwhile, these companies must also register their names, domains and server addresses with the CAC, as well as be responsible for censoring content and information that may threaten national security or disrupt social order, among other things. A minimum fine of RMB20,000 will be issued to those who fail to comply with these new regulations, while repeat offenders may face further criminal investigation.

Many that I've spoken to, including Menteshashvili, believe this isn't necessarily a bad thing. "People think [more regulations mean] that the government is against the technology, but this clearly is not the case," she tells me, noting that she sees this latest CAC initiative as China's evolving position on ICOs. While its tough stance on prohibiting any illegal fundraising schemes will remain unchanged, its desire to establish a basic framework for the sector is a sign that China is moving away from a hard ban.

Trista Ding from Shanghai Blockchain Technology Association also believes regulations will generate more interest in the technology. "Seeing how volatile the value of bitcoin has been, many risk-averse investors, especially those who aren't tech-savvy, wouldn't be keen on investing in any blockchain-related projects. But with more government oversight and regulations, it could potentially become more attractive for them."

Reality Check

Whether you're a staunch believer in blockchain or are unconvinced on whether its abilities could bring positive change to society as a whole, it's important to note that the technology is still in its infancy.

"During my four years in the industry, I've seen a lot of people who are either overly excited about the technology or are too skeptical about it," Menteshashvili sums it up. "People need to understand the value behind the actual design of the solution and how blockchain adds value to a specific use case, rather than just generalizing its effects. We need to manage our expectations and take a more realistic approach in developing it, because at the end of the day, you can't place all your hopes and dreams into blockchain... it's just a technology"

What Bay Valley will look like upon completion. Image by Dominic Ngai/That's. Design by Ivy Zhang.

Back in Yangpu district's Bay Valley, Ding is showing me around one of the partially renovated floors of Tower C7 – the Blockchain Building. "Look outside the window," she says, pointing at the new campus of Fudan University. "Tongji University and the University of Shanghai for Science and Technology [and several other distinguished higher education institutions] are all nearby. Yangpu district, and the city of Shanghai, certainly has what it takes to become an innovation hub for blockchain technology. There are many young tech talents here."

Following her gaze, I can almost imagine the future of blockchain happening right in front of me. Almost. At the moment, however, what I'm witnessing is a building – and a dream – that is still under construction.